Buy Amara Raja Batt; target of Rs 240: Sunidhi Securities

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Buy Amara Raja Batt; target of Rs 240: Sunidhi Securities

Sunidhi Securities is bullish on Amara Raja Batteries and has recommended buy rating on the stock with a target of Rs 240 in its December 15, 2011 research report.

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Sunidhi Securities is bullish on Amara Raja Batteries and has recommended buy rating on the stock with a target of Rs 240 in its December 15, 2011 research report.

"Incorporated in 1985, ARBL, a company with 26% equity each from Galla Family and Johnson Controls Inc, USA, is the technology leader and is one of the largest manufacturers of lead acid batteries for both industrial and automotive applications in the storage battery industry. The company has an integrated automotive battery manufacturing facility at Tirupati in south India.  In India, ARBL is the preferred supplier to major automobile OEM, telecom service providers, telecom equipment manufacturers, UPS sector (OEM & Replacement), Indian Railways and to power, oil & gas among other industry segments. ARBL is a leading manufacturer of automotive batteries under the brands - Amaron™ and Powerzone™, which are distributed through a large pan - India sales & service retail network. The Company's Industrial and Automotive batteries are exported to Asia Pacific, Africa and Middle East."

"ARBL's products comprise large, medium and small VRLA (valve regulated lead acid) automotive batteries. The industrial battery product portfolio offers capacities ranging from 4.5 Ah to 5,000 Ah. During 2010-11, Amara Raja introduced Amaron Volt, Hi-Life batteries- 2V high integrity series, designed to be robust, enduring and reliable. In the telecom sector, the batteries support switches and transmission (wire and wireless) networks; the Indian Railways uses these batteries in coach air-conditioning; the batteries also support the transmission and distribution networks of power stations. The UPS batteries support IT and ITeS operations as part of UPS systems that regulate power supply to critical equipment during voltage fluctuations. Small VRLA batteries, launched in 2009-10 find application in small UPS and emergency lamps."

"The ongoing capacity additions, both in the 4-wheeler and 2-wheeler plants will help ARBL capitalise on opportunities. Amara Raja also plans to cap exposure to the low-margin OEM segment to about 25% of its revenues. Post this Capex plan, the product mix is likely to shift 65:35 in favour of the auto segment, thereby reducing its dependence on the slow-moving telecom segment.  Steady volume from the auto segment, growth in replacement category, strong potential from UPS and railway/power application batteries could offset deceleration in telecom. The automotive sector will propel ARBL's growth over the next few years, with India expected to become the sixth largest passenger vehicle producer in the world with annual car sales projected to increase to over 9 million by 2020."

"With growing avenues, including replacement opportunities in the telecom sector, surging demand in the UPS and power sectors, exports to new geographies and the government's thrust to connect vast rural areas, there is a growing potential to drive Industrial battery business over the future.  In Telecom, Value Added Services (VAS) enabled by 3G and Wi-MAX, rural rollout and replacement requirement are expected to push the demand going forward. Driven by this upgrade need, ARBL has seen a pick-up in demand in the last few months. Given the strong tie-ups it has with players such as BSNL, Airtel and Idea, ARBL is expected to witness increased off take in the telecom segment going forward. However, the battery demand from telecom segment would grow at a slower 5% CAGR over FY10-13E."

"Overall, ARBL has a market share of about 16-17 per cent in the battery segment and hopes to further consolidate this business. In the near to medium term, even if OE sales take a back seat, the company will witness volume growth from the battery replacement demand for vehicles that were sold in the last few years. ARBL derives about 60 per cent of its auto segment revenues from the replacement market.  This will also boost operating margins as the ability to pass on cost escalations and effect price increases is higher here than in supplies to OEMs. To cash in on the replacement wave, ARBL has tied up with some OE clients to service the replacement demand of their (OEM's) customers.  At the CMP of Rs 194, the share is trading at a P/E of 9.3x on FY12E. We recommend BUY with a target price of Rs 240 at which the share will trade at a P/E of 11.5," says Sunidhi Securities research report.

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To read the full report click on the attachment